Market Forecasting is Dead


The ability to forecast the markets is dead. It can also be argued that it never existed.

Regardless of that oversight, we are entertained by a constant stream of “experts” on financial media who profess to understand why the market has acted on any given day, or how it will act tomorrow. Everyone of them is trying but very few get it right. When they do get it right you can attribute it to pure chance, as their track records for being consistent are far and few between.

Many investors, individual as well as institutional, rely on market experts and forecasters when making investment decisions, regardless of the fact that they keep coming up short. For example, on 3 January 2015 Thomas Lee predicted that the S&P 500 index would be at 2325 one year from his prediction. The S&P 500 ranged between 1867 and 2122 during this period, and closed at 2012 on 4 January 2016, well short of the goal. There have been several previous analyses of forecaster accuracy, both in academic literature and also in the financial press in the past. Although many will correlate with the S&P 500 during years of stability (where you could essentially just apply a variety of statistical methods to extrapolate into the future), they have been seen to be surprisingly unreliable during major shifts in the market. For example, an analysis by Nir Kaissar found that the strategists overestimated the S&P 500’s year-end price by 26.2 percent on average during the three recession years 2000 through 2002, yet they underestimated the index’s level by 10.6 percent for the initial recovery year 2003.

There are a variety of reasons why forecasting the markets is a futile exercise. As Nassim Taleb puts it - “The tragedy is that much of what you think is random is in your control and, what’s worse, the opposite.” Regular savings are in your control, your expectations and behaviour is also in your control, however, stock market moves in an uncertain world are not.

 

GAAP

Fundamentally, businesses usually go public to raise capital in hopes of expanding. The ownership of the business is then spread among a large group of shareholders. If the company’s earnings are solid and consistent, the share price is valued higher and the shareholders get rewarded for putting their money at risk. These companies issue quarterly and yearly earnings reports in order to provide current and any potential future shareholders a snapshot of the health of the company at that moment. To do so they usually apply what we call, “Generally Accepted Accounting Principles.”

But as the MIT Sloan Management Review recently pointed out,

“Lurking within the financial statements and communications of public companies is a troubling trend. Alternative metrics, once used sparingly, have become increasingly ubiquitous and more detached from reality.”

They went on to provide the following example:

“In 2011, Groupon Inc. announced plans for a highly anticipated initial public offering. But enthusiasm for the offering waned when the U.S. Securities and Exchange Commission (SEC) issued a comment letter questioning Groupon’s use of a profit metric it called “adjusted consolidated segment operating income.” To our knowledge, no company had ever used that metric before; it was intended to measure operating profit without including marketing expenses, stock-based compensation, and acquisition-related costs. Management argued that a $420 million loss from operations reported on its 2010 income statement should really be considered a $60 million gain.”

This is not an isolated example, and the use of these so called, “accounting tricks” have only become more sophisticated. What was once analysis of a businesses operations and their ability to satisfy customers and grow has become an exercise of forensic accounting analysis in order to spot the manipulators! Try forecasting the next clever income statement adjustment!


The Federal Reserve

What were once pretty much free markets have become markets that have become pretty much dependent on the next Central Bank intervention. QE1 took place in November 2008 when the Fed spent $600 billion on purchase of Mortgage-backed Securities (MBS) in order to “save” the financial system from ruin (which could be argued that they facilitated in the first place). But they didn’t stop there. They continued with QE2, Operation Twist, Operation Twist Extended and QE3. It didn’t stop with the Fed, as they do work closely with their central bank colleagues, such as the ECB and BOJ.

Total Assets of Major Central Banks

Was there an impact on the financial markets? Of course there was. They drove interest rates pretty much to zero for an extended period. As Quicken Loans pointed out, there will be a time when the Fed has to get out of their positions and when that happens:

“A new buyer, or more likely several of them, would have to pick up the slack and buy lots of MBS in order to keep mortgage rates where they are right now. No one has a crystal ball as to when the Fed will start to get out of the MBS market, either.”

So without a crystal ball or being privy to what the Federal Reserve has planned regarding future manipulations of the market, trying to forecast them is a futile exercise that serves no purpose.

 

High-Frequency Trading, Spoofing, and other Shenanigans

In addition to accounting trickery and central bank intervention, here are a few more choice headlines and examples as to why forecasting the markets is dead.

“Six banks fined $5.6bn over rigging of foreign exchange markets”

“HSBC faces fresh suit alleging forex manipulation”

“BNP Paribas pleads guilty to forex manipulation”

“Wells Fargo Accused Of Manipulating Business Banking Data”

Since 2007 we have seen a new player in town, high frequency traders. High-frequency trading is an automated trading platform used by large investment banks, hedge funds and institutional investors that utilizes powerful computers to transact a large number of orders at extremely high speeds. This has completely changed the dynamics of the markets. As JP Morgan pointed out in their own report of June 13, 2017:

"While fundamental narratives explaining the price action abound, the majority of equity investors today don't buy or sell stocks based on stock specific fundamentals," Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, said in a Tuesday note to clients.

Kolanovic estimates "fundamental discretionary traders" account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago, he said.

Which introduced another brilliant market manipulation called “spoofing,” and another choice headline to present:

“Gold, Silver Manipulation: CFTC Fines Deutsche, USB, HSBC For Spoofing Markets”

The CFTC announced earlier this year that Deutsche Bank, UBS and HSBC faced fines totaling $46.6 million. Deutsche Bank was the hardest hit as it was fined $30 million. UBS was ordered to pay $15 million and HSBC was fined $1.6 million.

How about naked short selling? Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale.
 
Paul Craig Roberts described this process as it is used in the gold markets:

“This manipulation by the Fed involves the short-selling of uncovered Comex gold futures. “Uncovered” means that these are contracts that are sold without any underlying physical gold to deliver if the buyer on the other side decides to ask for delivery. This is also known as “naked short selling.” The execution of the manipulative trading is conducted through one of the major gold futures trading banks, such as JPMorgan Chase, HSBC, and Bank of Nova Scotia. These banks do the actual selling on behalf of the Fed.”

To see proof of this, one just has to check the latest Comex Reports to see that the current ratio of paper gold to physical gold is 176:1.

 

Conclusion

The next time you are watching your favorite financial media program providing explanations as to what the market is doing now and what the market will do,  remember the previous points. Remember to ask yourself two questions, “Does this person really have the ability to forecast the markets,” and “should I have confidence in any of their conclusions?” Because, in reality, market forecasting is dead!

Comments

Let it Go Fri, 06/15/2018 - 07:03 Permalink

The current economy is becoming more of a conundrum every day. The global economy is like a Rube Goldberg machine, these machines are contraptions built in a ridiculously complicated way to perform what would normally be a simple task. Unfortunately, nothing is simple when it comes to economics.

It is best not to have a great deal of faith in our economic system because it is severely flawed. Central banks can stack the deck but when it gets too high and begins to fall they may not be able to control the direction or who it will crush. More on this subject in the article below.

http://brucewilds.blogspot.com/2017/03/understanding-economics-as-rube.html

LawsofPhysics Let it Go Fri, 06/15/2018 - 08:14 Permalink

"nothing is simple when it comes to economics" - Bullshit.  Economics is a social science that is intentionally made complicated so that fraud and theft can be enabled.

 

There are producers and there are consumers, period.  You do NOT need money to do either, but the two activities must remain in balance with the natural world we live in and the available resources, which are finite. The problem is that we are now all addicted to a system that is unsustainable and continues to reward bad behavior. Again, this is NOT how the natural world works.

In reply to by Let it Go

Conax Fri, 06/15/2018 - 07:20 Permalink

So the "market" isn't any such thing, it's all an illusion.

The whole thing, all day every day, is an intervention.

It's a policy tool. We'd better hope the policy is one that has us around, alive and kicking, eh?

The paper 'futures' in PMs are the same. A tribal control mechanism/money siphon for the same suspects. 

I wish I was this privileged. I'd be floating around the Med on my fiberglass island by now.

looks so real Fri, 06/15/2018 - 07:46 Permalink

I wouldn't say market forecasting is dead its needs to shift focus from cause and effect to what rich people, federal reserve and the government deem reasonable and acceptable  outcome on a day  to day basis.

10044 Fri, 06/15/2018 - 07:49 Permalink

"Market Forecasting is Dead"... unless you follow and listen to credible people like Martin Armstrong who has been DEAD right on everything including (YES) collapse of gold that's coming before 2020.

Bond Wizzerd Fri, 06/15/2018 - 11:05 Permalink

You display ignorance by talking about "the market" as if it were limited to one instrument. There are many markets, not all of which are manipulated. Bonds are a market, and they can absolutely be predicted - not with FUNdaMENTALs, whatever that is the charlatans called economists use - with computer algorithms.

Quivering Lip Fri, 06/15/2018 - 12:40 Permalink

How do you do due diligence in a world where fraud has been legalized.

Instead of reform after 2008, Wall Street and the FED doubled down on fraudulent numbers. 

Fucking Enron would probably have a market cap of 200 billion if it was still around.

Yellow_Snow Fri, 06/15/2018 - 13:08 Permalink

It is time for the SEC and CFTC to look at imposing limits on 'naked short selling' - once upon a time ago these were used sparingly...  Now used outrageously for massive leverage, gambling, or for manipulation purposes.

luna_man Fri, 06/15/2018 - 14:54 Permalink

 

What's that you say?..."market forecasting is dead" You're doing it wrong!

You see, I'm "short", been "short" and staying "short"...I'm gonna be rich, I tell ya!

DEMIZEN Fri, 06/15/2018 - 15:36 Permalink

maybe we cannot forecast the markets, but we can forecast the ppt response to human(market) behavior

if markets were random, they wouldn't exist in the first place. who puts money on 50/50 with 1.xxx annual return +tax liability?

what an article.

Chief Joesph Fri, 06/15/2018 - 16:37 Permalink

Market forecasting is dead, because you have people posting stuff that don't know much about stochastics or statistics.  Just like in this article, they put up a 2 dimensional graph of past performances, but they never make projections from it.  Do they even know what the term "projection" means?  They also don't assign any confidence values either, so you are never certain how good their data or the graph really is. Graphs of  past performance don't necessarily tell you anything forward in time.  You may visualize a trend on the graph, but there is no mathematics backing up any projections, nor do you see any cyclical trends.  

Get some "REAL" mathematical experts to interpret the data and do the forecasting. There is too much goofy nonsense in this article too, that isn't relevant to the graph above either.

brooklinite8 Sat, 06/16/2018 - 03:57 Permalink

Its like fortune tellers with the parrot picking a card and telling you what your future was back in the day. The smartest guy in this scheme was the one who made them believed that he knew what he was forecasting and what he knew was correct. The best part of is getting paid for it. Lol. Worst part is paying for this kinda crap. Weather, Markets and Fortunes are never to be forecasted or can never be forecasted.  Try forecasting what your wife is going to be like or what she is going to cook tonight... Get the fuck out of here. Got other things to do.

lizzoilz Sat, 06/16/2018 - 05:01 Permalink

Shepwave.com analysis has been on target. 

 

Recently went long stocks on May 3. 

 

Now they have a possible turn date for stocks.  They use a signal system of something.

 

 

CRUDE OIL TRADERS--as of the week ending 5/25/2018 WTI Crude Oil saw an OUTSIDE DOWN WEEK pattern. See how the action has unfolded since that time.  It is important to pay close attention to the implications that crude oil can have on the equity indexes.

Remember also--there is a potential CRITICAL TIME-CYCLE TURN DATE coming up soon. Things will get shaken up a bit. For now the markets are fine-tuning the manner in which they will get shaken up. 

Important Pattern in GOLD. As of this past week, GOLD saw an OUTSIDE DOWN week.  Be careful making assumptions based off of the outside down week we saw in WTI Crude Oil several weeks and the ease with which we predicted the mid term direction in Crude Oil. GOLD is in a different situation--BE READY! (And yes, it is likely related to the move in the $US. That is one reason why we will need to be careful not to make the wrong assumptions at this time.)